The Smartest Dividend Stocks to Buy for $500 Right Now

For investors, dividend-paying stocks offer immediate returns, and those with consistent, growing payouts have performed even better with lower volatility than the benchmark. S&P 500. One explanation could be that annual dividend increases force management to maintain a disciplined allocation of capital while signaling strong investor confidence in the company’s future growth.

Let’s dive into two dividend-paying stocks at a combined price of $500 that appear undervalued and either recently started paying dividends or have a strong track record of growing them.

1. The alphabet

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has fallen about 5% in the past month as the tech giant faces increasing regulatory demands on its search and advertising business. In addition, investors fear that Alphabet may be behind in the artificial intelligence (AI) arms race against the competitor Microsoftwhich holds a significant stake in Open AI, the company behind ChatGPT.

While long-term trepidation may keep the stock price down, Alphabet’s business is generating more revenue and profit than ever before. In the first half of 2024, the company generated $165.3 billion in net sales and $47.3 billion in net income, representing year-over-year growth of 14.5% and 41.5%, respectively.

Alphabet’s balance sheet shows that in the most recently reported quarter, the company had $88.9 billion in net cash. The excess cash likely gave management the confidence to initiate its first dividend earlier this year. The company currently pays a quarterly dividend of $0.20 per share, equivalent to an annual yield of 0.53%.

In particular, Alphabet’s payout ratio — the percentage of a company’s income paid out as dividends — is incredibly low at 2.8%, meaning management will have plenty of room to raise its dividends in the future.

Management also returns capital to shareholders through share buybacks, which increase investors’ holdings without requiring additional purchases. In the first half of 2024, Alphabet spent $31.4 billion on share buybacks, reducing its shares outstanding by 1.2%. Given that Alphabet’s outstanding shares have fallen 10.9% over the past five years and it announced a new $70 billion share buyback in April, it looks like management will continue to prioritize this method of allocation of capital to its shareholders in the near future.

Returning to the perceived threat to Alphabet’s business, management understands the importance of artificial intelligence and is investing money in the transformative technology. CEO Sundar Pichai highlighted Alphabet’s investments in artificial intelligence on the company’s most recent earnings call, adding: “The only way I think about it is when you go through a curve like this, the risk of underinvesting is dramatically higher than the risk of overinvesting for us. Here.”

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The company has invested $25.2 billion in capital expenditures for the first half of 2024, the majority of which has been allocated to AI development. By comparison, Alphabet spent $13.2 billion in capital expenditures in the first half of 2023.

Even though it’s considered a laggard in the AI ​​boom, Alphabet remains the market leader in ads and search and owns valuable properties like YouTube. Based on the price-to-earnings (P/E) ratio, which compares a company’s earnings over the past 12 months to its share price, Alphabet appears undervalued. That’s because the stock currently trades at about 22.3 times earnings, well below its five-year P/E ratio average of 26.8.

2. The caterpillar

Caterpillar (NYSE: CAT) the stock has stagnated of late, generating a total return of just 1.5% over the past six months. However, the world’s largest construction equipment maker is a dividend pioneer, paying a quarterly dividend since 1989 and increasing it for 31 consecutive years. Today, Caterpillar pays a quarterly dividend of $1.41 per share, representing an annualized dividend yield of approximately 1.7%. Additionally, with a payout ratio of 23.7%, investors can reasonably expect management to continue its impressive dividend growth streak in the coming years.

Similar to Alphabet, Caterpillar buys back its stock from hand. Management has reduced its shares outstanding by 2.9% in 2024 and by 12.3% over the past five years.

Caterpillar’s management regularly declares plans to “largely” use its free cash flow from machinery, energy and transportation (ME&T) for dividends and share buybacks. For 2024, it estimated that this measure will be in the range of $7.5 billion to $10 billion. Although an impressive prospect on the surface, Caterpillar has generated $10 billion in ME&T free cash flow in 2023, which is why some investors are shy about the stock.

However, there is a reason behind the stagnation: sustained higher interest rates are affecting global demand for construction projections. In its most recently reported quarter, Caterpillar generated net sales of $16.7 billion and its reserve was $28.6 billion, down 4 percent and 7 percent year-over-year, respectively.

The good news is that interest rates are on track to come down in the coming months, which management believes will help some areas of its business, such as building warehouses or other rate-sensitive projects. In the long term, Caterpillar will benefit from US government-related infrastructure projects and demand for new housing in North America. Specifically, Caterpillar continues to reap windfalls from the $1.2 trillion Infrastructure Investment and Jobs Act signed into law in 2021 and the fact that America has underbuilt about 4.5 million homes since the Great Recession.

Similar to Alphabet, Caterpillar also trades at a low valuation compared to historical averages. Today, the construction-focused company trades at 15.5 times earnings, below the median five-year P/E ratio of 16.9.

CAT PE report data by YCharts

Should You Buy These Dividend Stocks?

Whether it’s the start of a dividend journey or 30+ years, these two stocks are well-positioned to continue rewarding shareholders with a growing dividend. Again, according to research, this is a key factor for a stock to outperform the market over the long term. Combine that history with what appear to be fair valuations, and Alphabet and Caterpillar are two stocks to buy for any portfolio.

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Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Collin Brantmeyer has positions in Alphabet, Caterpillar and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

The Smartest Dividend Stocks to Buy for $500 Right Now was originally published by The Motley Fool